Well in most cases we can safely say it costs an awful lot more than it should. But how much more is often difficult to assess.
We are one of a small minority of financial advisers that choose to openly publish our charges on our website. Most advisers prefer to keep their fees as a jealously guarded secret. And advice fees are only one part of the equation. When you include investment and platform costs it is notoriously difficult to understand, let alone, calculate overall charges. However, I think what follows is pretty accurate.
Initial advice charges
We know that something like 1 in 8 of all financial advisers now represent St James Place who have a standard upfront charge of 5% on many of their funds. We also know that Chase de Vere have previously confirmed a standard 3% initial charge on investments up to £250,000. So that would be a fee of £7,500 – which let’s face it is an awful lot of money but still a relative bargain next to the £12,500 from St James Place.
In the old days of commission, 3% was pretty much the starting rate so it is perhaps not surprising that many firms have opted for that as their initial charge. Certainly, anyone charging 2% or less would regard themselves as being very fair.
At Candid Financial Advice we charge an initial advice fee of £1,500 plus 0.10% of the sum invested above £1,500. So based on £250,000 (whether new monies or ISA/pension transfers etc) our initial fee would be £1,600, equivalent to 0.64%.
Annual ongoing advice fees
But whilst initial fees catch the eye, it is usually the, apparently lower, annual costs that do the most damage. Your initial fee is the headline grabbing one-off. The annual fees act like an anchor on your money year after year after year. Many advisers, when pushed, will give ground on their initial charge, safe in the knowledge that their annual fee is the bigger prize.
Prior to the sales commission ban at the end of 2012, most investment funds paid advisers 0.50% a year. Since then, many advisers have been working hard to increase their annual take, with 1.00% increasingly becoming the norm. So, while banning commission was undoubtedly a sensible move, the unintended consequence has been many advisers seeking to double their annual fees.
By contrast, our annual ongoing advice fees are significantly lower than the norm, especially on larger portfolios.
Investment management fees
To rub salt into the charge’s wounds, the majority of advisers these days offer some sort of portfolio management service – either directly themselves or outsourced to another firm. This could be under various guises: a portfolio management service (PMS), discretionary or multi-manager service. Either option usually means paying another investment manager, who sits above the underlying funds held, so overall annual investment charges can rocket. Expect to pay around 1.3% - 1.50% a year, in addition to the adviser’s annual financial advice charge.
And whilst outsourcing investment management makes an adviser’s life much easier, few reduce their annual fee to reflect this.
At Candid Financial Advice we don’t outsource. We look after client portfolios ourselves using a blend of actively managed and index-tracking funds, with an average annual fund cost of around 0.50% - 0.70%.
Annual investment platform fees
The final piece of the jigsaw is the investment platform where your money is typically held, often within an ISA or SIPP. Platform charges vary but are typically around 0.20% - 0.50% a year depending on the sum invested. Even then, larger advice firms have been known to use their buying power to secure advantageous terms from the platform…which they pocket for themselves rather than pass on to their clients.
Where appropriate we use Alliance Trust Savings, currently the only platform open to advisers that charges fixed annual fees, saving hundreds if not thousands of pounds a year for clients with larger portfolios.
We know other platforms offer a lot more functionality to help advisers, but it does what we need. We can buy and sell funds quickly and cheaply, and clients can see their values at the touch of a button. In our mind’s platforms are a utility, it doesn’t add to performance, so why should our clients pay fortune just to make our lives a bit easier?
Putting all this together
Let’s go back to our £250,000 example and assume a 3% initial charge, 1.35% a year portfolio management charge, 1.00% a year adviser fee and 0.35% a year platform fee – total annual costs of 2.70% a year.
With Candid Financial Advice the initial fee would be 0.64%, say 0.55% a year for the investments, 0.60% adviser fee and 0.18% a year platform fee – total costs around 1.33% a year. For larger cases those cost differences become much greater, with many of our clients paying around the 1.00% mark overall all-in.
Because I'm worth it
At this point many advisers pipe up and talk about cost versus 'value', or comparing their service to buying a luxury car or handmade suit. In essence, they'll try and convince you they're worth it. It’s plausible nonsense.
Of course quality costs, but that is not an excuse for overcharging.
Many advisers charge high fees because they can; because they have got used to charging it; because everybody charges a similar amount; because percentages don’t sound very high until multiplied by big numbers; because the whole thing is so opaque and hard to compare that most people don’t know what fair charges should look like anyway; because….because…because. Let’s face it, few people in life would voluntarily impose a pay cut even if they are hugely overpaid.
High fees are terrible value. They do severe damage to your final returns and many business models are set up to serve the adviser rather than the client! Many of these advisers are perfectly nice people but something somewhere has gone awry.
We deliver our advice remotely and are pretty lean and mean so we don’t expect other firms to be as keen on us on costs. Certainly 2.70% is shockingly high and our general view that total costs above 2.00% a year should act as a red flag.